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Worst weekly drop for S&P 500 in more than two years

U.S. stocks declined on Friday, with the S&P 500 recording its worst weekly loss since June 2012, as momentum from the prior day's rout remained in play.

Procter & Gamble gained after the consumer-goods company posted profit that exceeded estimates; Tesla Motors climbed after the electric-car maker projected increased output in 2015; shares of LinkedIn rallied after the professional network projected revenue that topped expectations and GoPro slid after the maker of wearable cameras reported a larger quarterly decline from the year-ago period.

"I find it very hard to get scared by a sell off caused by an economy that is improving and rates coming up from very low levels. It's not a recipe for stock-market disasters," said David Kelly, chief market strategist at J.P. Morgan Funds, referring to the notion that the equities market was headed for a large drop on fears of the Federal Open Market Committee hiking interest rates sooner than anticipated.

Kelly and several other market strategists said there were few fundamental reasons driving the market lower, other than it's been a long while since equities had a sizable pullback.

"The market is ripe for a pullback; anxieties are sufficiently high enough for that to occur," said Mark Luschini, chief investment strategist at Janney Montgomery Scott.

"If you think about it, how long has the entire world been calling for a five percent correction?" asked JJ Kinahan, chief strategist at TD Ameritrade.

"The market feels like an overtired child, no matter what you do for it, it's going to burst out crying," said Kelly at J.P. Morgan Funds.

Ahead of Wall Street's open, stock-index futures scaled back their drop in the wake of the data, which found nonfarm payrolls rose by a less-than-expected 209,000 last month and the jobless rate rose to 6.2 percent.

Read MoreJob creation misses expectations

"Today's jobs number is a 'bad news is good news' kind of thing," as it helps defer the view that the Fed-funds rate may see lift off sooner than estimated, said Luschini.

The market's display of fickleness, trading off daily-data points, is unlikely to be mirrored at the Federal Reserve, where Fed Chair "Janet Yellen and the doves are going to take a very deliberate" approach to monetary policy, said Luschini.

On CNBC Friday, Dallas Fed President Richard Fisher said he believes more of his colleagues on the Federal Open Market Committee are coming around to his view that the rates could start rising early next year if the data keep coming in stronger.

Read More Fisher: Rates could rise 'early next year'

"If that's the case, the market is going to have to adjust to that," said Luschini, noting the market is currently pricing in such a move in the second or third quarter of 2015.

Trading in shares of Banco Espirito Santo were suspended by regulators in Portugal pending information about the troubled bank.

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After Thursday's spike to its highest level since April, the CBOE Volatility Index, a gauge of investor uncertainty, on Friday rose 0.5 percent to 17.03.

After falling 126 points, the Dow Jones Industrial Average declined 69.93 points, or 0.4 percent, to 16,493.37, down 2.8 percent from the week-ago finish.

JPMorgan Chase, American Express and Goldman Sachs Group led blue-chip losses, which included 22 of 30 components.

Falling 2.7 percent for the week, the S&P 500 dropped 5.52 points, or 0.3 percent, to 1,925.15, with telecommunications and financials hardest hit and consumer staples and utilities faring best among its 10 major sectors.

The Nasdaq shed 17.13 points, or 0.4 percent, to 4,352.64, off 2.2 percent for the week.

For every stock rising, less than two fell on the New York Stock Exchange, where 792 million shares traded. Composite volume cleared 3.8 billion.

Traders work on the floor of the New York Stock Exchange (NYSE) on Friday.
Spencer Platt / Staff | Getty Images
Traders work on the floor of the New York Stock Exchange (NYSE) on Friday.

On the New York Mercantile Exchange, oil futures for September delivery fell 82 cents, or 0.8 percent, to $97.35 a barrel, and gold futures for December delivery rose $12.30, or 1 percent, to $1,295.10 an ounce.

The dollar edged lower against the currencies of major U.S. trading partners and the 10-year Treasury yield fell 6 basis points to 2.495 percent.

Wall Street offered muted reactions to other economic reports on Friday.

The ISM manufacturing index hit 57.1 in July; construction spending fell 1.8 percent in June and a gauge of consumer sentiment from the University of Michigan/Thomson Reuters declined slightly in July.

"We still have this Argentine credit situation rearing its ugly head," said Kinahan, referring to the International Swaps and Derivatives Association effectively declaring Argentina in default.

The development is "not good for Argentina, but it is unlikely to be a game changer for the global economy," said Kelly at J.P. Morgan.

On Thursday, stocks tumbled, with the Dow and S&P 500 posting their first monthly drop since January, as investors worried about Europe's economy, an Argentine default and a jump in U.S. labor costs prompted concerns about corporate margins.

Read MoreStocks hit; first monthly drop in six for Dow, S&P 500

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